Buoyed by impressive second-quarter 2012 results and strategies undertaken to reposition itself in an economy that still lacks luster, we have adopted a bullish stance on OfficeMax Inc. (OMX). We upgrade our recommendation to Outperform from Neutral with a target price of $9.00.
OfficeMax provides office supplies and paper, print and document services, technology products and solutions as well as office furniture to business firms, government organizations and other retail consumers.
Healthy Bottom Line Result
Amidst a tough economic environment, OfficeMax posted better-than-expected second-quarter 2012 results. The quarterly earnings of 12 cents a share surpassed the Zacks Consensus Estimate by 5 cents and rose substantially from 7 cents earned in the prior-year quarter, on the back of effective cost management. The company also reinitiated its quarterly dividend of 2 cents a share after suspending it three and a half years ago.
However, total sales dropped 2.7% to $1,602.4 million year over year, and also fell short of the Zacks Consensus Estimate of $1,638 million.
The office supplies retailer now expects third quarter sales to remain even with or marginally higher than the prior-year period, including the adverse impact of foreign currency translation. Sales for fiscal 2012 are projected to be flat with the prior year, including the negative impact of foreign currency translation and excluding the extra week in 2011, which resulted in incremental sales of about $86 million.
Company’s Strategies to Stay Afloat
As the recovery in the economy still remains sluggish, consumers and small businesses remain frugal about big-ticket spending like business machines and other durables. Therefore, we believe that the demand for office products is closely tied to the health of the economy.
Consequently, OfficeMax is repositioning itself to stay afloat amidst a difficult consumer environment. The company is containing costs, closing underperforming stores and focusing on innovative products and services, which should all contribute to margin improvements. Further, the company anticipates regaining operating margins of over 3.8% by 2015.
Additionally, the company focuses on optimal store sites in order to boost store productivity. Moreover, OfficeMax is committed to improve sales per square foot by increasing customer traffic and converting them into potential buyers by targeted advertising, ongoing sales training and customer-oriented initiatives. The company has initiated control center technology services to assist customers with PC maintenance or removal of viruses.
As part of its strategic retail partnership initiative, OfficeMax commenced a pilot program with RadioShack Corporation (RSH) in January 2012, under which the employees of the latter are selling mobile products and accessories and offering services in some of OfficeMax stores in San Francisco.
On the other hand, RadioShack is helping OfficeMax to enhance its consumer electronics offering. The initiative is assisting in driving traffic as well as optimizing selling space utilization.
Genuine efforts are being implemented to combat the tough economy. Business budget remains tight, consumers remain cautious than ever before and companies are trying hard to navigate through the challenging maze.
The above analysis supports our unbiased view, and advocates our bullish stance on the stock. Moreover, OfficeMax, which competes with Office Depot Inc. (ODP) and Staples Inc. (SPLS), holds a Zacks #2 Rank that translates into a short-term Buy rating.
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